This paper sets up and solves a spatial equilibrium model of the housing market. The model is a dynamic version of the canonical compensating-wage differential model of Rosen (1979) and Roback (1982). In contrast with the urban economics tradition of studying house prices in one region given some exogenous outside option of living in the countryside (the “reservation locale”), we model the entire distribution of regions. This has several advantages. First, the model provides predictions for the entire cross-section of income, house prices, and construction.
In many countries around the world, electronic card-based payments have been replacing older types of payments at a rapid rate. In the United States, use of both debit cards and credit cards has been rising, while check volumes have been declining. In addition, the amount of cash in circulation has been growing more slowly in recent years. This transition from paper-based payment methods to electronic payment methods has certainly modernized the payment system; however, it is not clear whether the incentives inherent in the current payment system infrastructure will lead participants to make socially optimal choices among alternative payment methods. In addition, increased use of electronic payment methods has generated a number of public policy debates.
One prominent policy debate concerns interchange fees. These fees, which typically involve a payment from a merchant’s bank to a card user’s bank for each debit card or credit card transaction, are determined at the network level and are generally the same for all banks participating in a network. Merchants’ banks generally pass the costs associated with interchange fees through to merchants. In recent years, increases in interchange fee rates, together with growth in the volume of card transactions, have led to a dramatic rise in interchange fee payments, and consequently in merchants’ cost of accepting payment cards. As a result of these developments, merchants have increasingly expressed concern about their costs associated with card transactions.
In view of the occurrence of subprime mortgage crisis in the United States, Mortgage Insurance Companies Association (MICA) have reported that large mortgage insurers of its members have recorded $2.6 billion in losses in 2008. The report sparks concerns that rising foreclosure rates of the borrowers could force the mortgage industry into a money crunch. For example, Shares of Radian Guaranty, Triad, and PMI Mortgage Insurance Group have lost 90 percent of their share value in 2007; Triad Guaranty Insurance Corporation fails to meet capital requirement in March 31, 2008 and may even going to be out of business. As a consequence, the phenomenon that the defaults of the borrower will spill over into the default probabilities of the mortgage insurer needs to be considered, and it is termed ‘counterparty default risk’. However, when the mortgage insurer fails to meet the risk-to-capital ratio and the government is forced to allow continuing their operations in order to avoid the systematic economic crisis, capital forbearance occurs. It is essential to incorporate the counterparty default risk and capital forbearance, generally not considered by the previous studies, into the pricing model of mortgage insurance?particularly in the case of a mortgage crisis.
